Decision
50There are essentially two questions to be resolved. The first is whether Unitywater holds the proceeds of conversion of the ANZ guarantees as "Security". The second is the proper construction and application of the obligation to account.
First question: characterisation of the proceeds of conversion
51The ANZ guarantees and the Westpac guarantee were held by Unitywater as security for the performance of EGL's obligations under the contract. The fact of conversion of those guarantees into money did not mean that the proceeds of conversion were anything other than such security. This was, I think, common ground; and in any event, it follows necessarily from clause 25.4. That clause expressly recognises that "Security" may comprise either or both of a guarantee given pursuant to cl 25.2 and cash. It contemplates, also, that the form of any "Security" given and held may change from time to time.
52Accordingly, and consistent with the proposition stated at [39] above, Unitywater's conversion of the ANZ guarantees into cash does not of itself mean that the proceeds were held as anything other than "Security". If that position were to change, it would be necessary for Unitywater to have done something which changed the character of the proceeds of conversion, so that they will no longer held as "Security". That is why Mr Rudge submitted that, in the context of this particular case, it should be concluded that Unitywater had had recourse to the proceeds of conversion.
53There was however an element of inconsistency in this aspect of Mr Rudge's submissions, and in my view it highlights the essential difficulty which Unitywater faces. From time to time, in the course of his oral submissions, Mr Rudge said that the proceeds of conversion were held by Unitywater as "security" pending EGL's performance of its contractual obligations (see, for example, T 26.45-27.40). He sought to escape from the obvious consequences of this analysis by focusing on the obligation to account. Mr Rudge submitted that the process of accounting does not require Unitywater to repay the unexpended portion of the proceeds of conversion (in this case, nothing has been spent so all the proceeds of conversion are available). Instead, he submitted, Unitywater could "account" simply by stating that it proposed to use the proceeds of conversion, if necessary, to indemnify itself in the event that EGL does not perform its repair obligations (as Unitywater sees those obligations).
54Mr Rudge placed particular reliance on clause 39.13. He submitted that it was not necessary for Unitywater to have spent any money before a right of indemnity arose. That may be accepted. But it does not follow that the proceeds of conversion of the ANZ guarantees are held as anything other than security for the performance by EGL of its obligation to repair, or as security against the secondary obligation of EGL to indemnify Unitywater in the event that the repair obligation is breached. (In saying this, I am assuming, without deciding, that EGL has a conceded or demonstrated obligation to repair at no expense to Unitywater.)
55Unitywater has not expended any part of the proceeds of conversion. It has not incurred any expense on its own account in the performance of what it says are EGL's obligations to repair and maintain. It has given notice to EGL to carry out the necessary work, and is awaiting performance (or non-performance) of the requirements of that notice. In those circumstances, I think, Mr Rudge was correct to characterise the proceeds of conversion of the ANZ guarantees as being held by way of security for the performance of those obligations of repair and maintenance.
56As I have noted, Mr Rudge submitted that Unitywater had used, or had recourse to, the proceeds of conversion, so as to deprive them of their character as "Security", by paying them into a bank account opened for the specific purpose of funding repair and maintenance works. If this submission were correct, it could undermine the clear contractual mechanism for the gradual reduction, over time, of the amount of security that EGL was required to provide. That is so because Unitywater would have the ability, by a unilateral (and non-consensual) characterisation of the proceeds of conversion (or, for that matter, of "Security" comprising cash) to deprive that money of its contractual character as "Security", and thus, perhaps, take it outside the obligation to account. Whilst I have suggested earlier that appeals to commercial common sense (or nonsense) are not of great significance in the context of this case, that is one consequence that, I think, should be avoided if at all possible.
57Mr Rudge submitted that the ANZ guarantees (more accurately, the "Security" required to be given by EGL pursuant to cl 25.2 of the contract, and the proceeds of their conversion) should be regarded as risk allocation devices.
58In support of this conclusion is the circumstance that the form of guarantee to be given as security was prescribed by the contract. That was a matter which Charles JA regarded as important in Fletcher Construction (and which, it seems, the Full Court regarded as important in Clough Engineering .) However, the additional features on which Charles JA relied are notably absent in this case.
59First, and most important, there is no equivalent of the contractual provision that entitled the principal to call upon the guarantee if Fletcher Construction did not pay the costs on demand.
60Secondly, though there is a dispute as to performance of the obligations of repair and maintenance (because EGL says that it is not obliged to do so unless it is paid), the time limited by Unitywater for completion of those works has not yet expired. The notice that Unitywater gave to EGL required the works to be performed by 8 November 2011.
61Thirdly, Unitywater has not itself incurred any expense.
62Mr Rudge sought to overcome those points by referring to cl 39.13. He submitted, correctly, that it was not necessary that Unitywater should have incurred any expense before it enforced a right of indemnity. The right of indemnity is to be found in cls 4.3 and 32.1. But neither of those clauses to gives any right to Unitywater to recoup itself out of the guarantees or their proceeds, in the event that EGL does not perform some contractual obligation. Nor does cl 25.4 goes so far. On the contrary, it recognises that conversion, of itself, does not amount to appropriation.
63In my view, the obligation cast on EGL as "the Contractor" to provide Security to (as it now is) Unitywater has both characteristics identified in Fletcher Construction : security properly so called, and as a risk allocation device. In this context, as I have noted, Callaway JA recognised (in Fletcher Construction at 826) that the two purposes need not be inconsistent.
64In coming to this conclusion, I do not think that it is significant that the form of guarantee is prescribed by the contract. That is important, in a commercial sense, whether the guarantee is intended to serve only the first purpose - the provision of security - or whether it is intended to serve the second as well. Indeed, one might say, it would be particularly if the guarantee were intended to serve (only) as security that its unconditional nature should be specified in detail by the contract pursuant to which it was given. If that were not done, it might not be "as good as cash".
65However, there are other indicia in the contract with which I am concerned that the guarantee is intended to serve, as well, the function of risk allocation pending resolution of a dispute.
66The first of those indicia is the very fact that Unitywater is entitled to convert "Security" into cash at any time. It is axiomatic that, if Unitywater does so, it must hold the cash so obtained in some account, at least until (should it happen) there is an occasion to have recourse to the cash. The parties thus contemplated that at any time Unitywater was entitled to call upon guarantees held by it, and to hold the proceeds in its own name.
67The second indicium is to be found in the very wide terms of the indemnities given by EGL to Unitywater pursuant to the contract. Not only is EGL required to perform its various obligations, it gives indemnities to Unitywater against (among other things) the consequences of non-performance of those obligations.
68The third indicium - and in my view the critical one - is that a party having a right to indemnity is not required to spend its own money before calling upon the right. That indicates, in my view quite clearly, that where there is a genuine claim to be indemnified, the party making that claim is entitled to call upon the indemnity even though it is not out of pocket. It follows, where the party has the benefit of Security that supports performance of (among other things) the obligation to indemnity, then the Security is available in satisfaction of the claim.
69I have no doubt that, in some cases, it would be open to Unitywater both to convert a guarantee into cash and to take the proceeds for itself, in satisfaction of some right to indemnity. But in the circumstances of this case, I do not think that it has done so. On the contrary, I think, as Mr Rudge conceded, Unitywater is doing no more than keep the proceeds of calling on the guarantees until such time as it knows whether EGL has performed what are said to be its obligations of repair and maintenance.
70In my view, the proceeds of conversion are held as Security unless and until they are drawn upon, in the sense of being expended, for the purpose of making good EGL's (allegedly) unperformed obligations of repair and maintenance, or in satisfaction of EGL's obligation to indemnify. That conclusion focuses attention on the second question: the content of the obligation to account. It does so because Mr Rudge submitted that in any event Unitywater would "account" if it stated that it was holding the proceeds of conversion against performance of EGL's obligations.
71Before I turn to that question, I note that there was some debate between the parties as to whether, in the event that EGL carried out the requirements of the notice (or in the event that it was held, either through the contractual dispute resolution process or otherwise that EGL was not required to do so - at least, without being paid), Unitywater would be under some obligation to refund the proceeds of conversion to EGL.
72The decision of Charles JA in Fletcher Construction touches on this topic. At 822, his Honour referred to the possibility that, if the principal were permitted to call on the letters of credit, the contractor "would be very seriously disadvantaged if it were unable to recoup these monies later, with interest, if it should be determined in the arbitration that [the contractor's] contentions... are justified". The principal submitted that, in that event, the contractor would be entitled to the return of the money with interest. His Honour observed that this submission "would seem clearly correct". However, since his Honour based this observation on the terms of the contract, not all of which are set out in the reasons for judgment, it is a little difficult to evaluate it.
73In this case, Mr Rudge submitted that, if his client retained the proceeds of conversion and was later found not to have been entitled to do so, it would be liable to repay them to EGL. Mr Christie submitted that there was no basis on which, in the events under consideration, his client would be able to recover the money.
74Since the point was not fully argued, and since it does not seem to me to bear on the outcome, I do not propose to express a concluded view. However, for the reasons that I give at [84] - [85] below, my provisional view is that Mr Rudge's submission should be preferred.
Second question: the obligation to account
75The ordinary English meanings of the phrasal verb "account for" include: "serve as or provide an explanation or reason for"; "give a reckoning of or answer for (money etc. entrusted); answer for (one's conduct)"; "...supply or make up a specified amount or proportion of"... . See the Australian Oxford Dictionary, 2 nd edition, 2004.
76The concept of account is well known in the law. The common law action of account was a cumbersome process involving three stages. The first stage was an enquiry to see whether the defendant was an accounting party. The second was an examination of the defendant before court-appointed auditors to take an account and to determine the balance one way or the other. The third was an action for payment of the balance so determined. In equity, the remedy of account was only available against an accounting party, but the procedure was somewhat less cumbersome than the procedure at law. Thus, both at law and in equity, it was necessary for the defendant to be someone who, if the balance of the account were found to be against him, would be liable to pay it before he could be characterised as an accounting party, and thus one against whom an account could be taken. The process of accounting was inextricably bound up with the obligation to pay any amount found due on the taking of accounts.
77I think it is unlikely that the parties intend to incorporate into their agreement the legal or equitable concepts of "account"; and likely that they intended the obligation to account to have its ordinary English meaning. That is to say, I think that the parties intended that, when Unitywater is required to account for the securities held by it, it is required to explain what has happened to them, or give a reckoning of what it has done with them (including so much thereof as had been comprised of, or had been converted into, money).
78Adapting those general observations to the facts of this case, Unitywater will explain what has happened to, or give a reckoning for, the guarantees by saying that they have been converted into money, and that the proceeds have been paid into the particular account to be held until it sees whether EGL performs what are said to be its obligations of maintenance and repair.
79I do not think that it follows that Unitywater is obliged to hand back the proceeds of conversion simply because they have not been spent. There is alleged to be an outstanding breach of EGL's obligations of repair and maintenance. EGL has been given an opportunity (one might say, a last opportunity) to rectify that alleged breach. Even accepting, as I have concluded, that Unitywater holds the proceeds of conversion as security for the rectification of the alleged breach, or against EGL's obligation to indemnify Unitywater for the consequences of that alleged breach, it does not follow that Unitywater is obliged to repay the money simply because the question of breach has not been decided and the amount of any liability has not been precisely quantified.
80If there were no case of breach, or alleged breach, then the mere fact of conversion would not entitle Unitywater to hold onto the money. In that hypothetical circumstance, the obligation to account would require Unitywater not just to explain, but also to hand over, or pay over, the old Security, in exchange for the new. In other words, the practical application of the obligation to account, and what must be done to satisfy it, will depend very much on the factual circumstances in which the obligation arises.
81Thus, where there is an alleged breach, and where it is clear that if there is a breach, its monetary consequences are likely to exceed substantially the amount of the security, in my view Unitywater is entitled to retain the proceeds of conversion until the question of breach is decided one way or the other. Any other conclusion would deprive Unitywater of the benefit of the Security. It would destroy the very purpose for which that security has been given: "for the purpose of securing the due and proper performance of the obligations of [EGL] under [the] Agreement" (cl 25.1).
82In short, I conclude, on the facts of this case, that Unitywater will account sufficiently for the Security held by it if it explains what it has done with the three guarantees that were given to it; and for what purposes, or more specifically in respect of what alleged breaches, those guarantees or the proceeds of their conversion are being held.
83That construction seems to me to be consistent with the characterisation of the "Security" required to be given as serving the dual purposes of security strictly so called and risk allocation. If the construction of the obligation to account for which Mr Christie contended were correct, that latter function would be rendered nugatory, even where there is a genuine and seriously arguable dispute, simply because the "rollover" date came and went before that dispute could be resolved. The risk in respect of that dispute, of being out of pocket until its resolution, that had been allocated to EGL would be reallocated to Unitywater.
84There is some practical advantage to the construction that I think is correct, of the obligation to account. When that obligation arises for performance, Unitywater is, in my view, required (at least initially) to give an explanation or reckoning of what it has done with the proceeds of conversion. The explanation or reckoning that it gives can be tested against the contractual purposes for which the security is held. If the explanation is not one that would authorise the retention of the Security, then Unitywater must hand it over (if unconverted) or repay it (if converted). Likewise, if the reckoning were to show that some of the proceeds of conversion had been applied for an unauthorised purpose, Unitywater would be obliged to repay or reinstate.
85Thus, what in my view is the correct construction does not mean that EGL is automatically denied any opportunity to recover the Security (in whatever form it exists). On the contrary, by entitling EGL to an explanation or reckoning, it enables EGL to determine whether the explanation or reckoning is sufficient, and to assert a right to return of the Security if it concludes that the explanation or reckoning is insufficient.
86I acknowledge that this construction means, in effect, that Unitywater is entitled to hold both the Security given for the period that expired on 30 June 2011 and the further (although lesser in amount) Security that is required to be given for the next period. However, that does not seem to me to lead to inconsistency, let alone to absurdity.
87The position may be tested fairly simply. Suppose that prior to 30 June 2011, the alleged breach were admitted, or had been held by the working out of the dispute resolution process under the contract to be a breach. There can be no doubt that Unitywater would be entitled to hold the guarantees, or the proceeds of conversion, until the breach had been rectified, either by it or by EGL. Why is the position any different because the question of liability has yet to be determined? In the former case, Unitywater would have the benefit of the Security and would be entitled to the fresh Security. (And if, in the former case, Unitywater had done the work itself, it would be entitled to reimburse itself from the proceeds of conversion of Security.) In the latter case, Unitywater has the Security against a determination on the question of breach.
88The situation would be otherwise if Unitywater had held onto the Security even though there was no alleged breach. But that hypothetical situation is far removed from the present facts. It was not suggested that Unitywater's complaint of breach was made in bad faith, or that it was groundless, or that it was merely a colourable attempt to give plausibility to its retention of the benefit of the Security.